Investor Gold-Buying to Resume; Fed Doubling Its Balance Sheet -- Again!
A leading precious metals consultancy says investors will buy record amounts of gold in the remainder of 2012. And the Fed will add $40 billion per month to its balance sheet.
GFMS may be right. This past week, gold hit its high for this year at $1,790 an ounce on the back of the various global stimulus plans launched by a number of countries. Critical among the recently announced stimulus plans was the Federal Reserve's QE3, or as some in the market have called it, QE Infinity. Philip Klapwijk of GFMS said that, for the gold market, "QE3 has become talismanic."
The Federal Reserve said it would purchase $40 billion per month in mortgage-backed securities indefinitely. In addition, the Fed will continue Operation Twist – the buying of longer-dated US Treasury notes and bonds. When all is totaled, the market is looking at about $85 billion a month in government bond purchases for an unlimited period of time.
The main characteristic of QE3 that drives the gold market is the fact that the open-ended purchases of all of these Treasuries will be financed by money that does not yet exist! And it's not just about a fear of future inflation being ignited by all this money creation. It's a very logical move higher by gold based on recent history of Fed actions and gold prices.
Even ignoring Operation Twist, the Fed will add $40 billion a month, or $480 billion a year, to its balance sheet. If you look at the Fed's own website, you will see that it shows current assets of $2.8 trillion. Add $480 billion annually to that and in about five years the Fed's assets (the foundation of the money supply) will have nearly doubled.
That is exactly what happened in the last five years too...the Fed's assets doubled. And in what should not be a surprise to gold investors, the price of gold also doubled! For the past decade or so, gold has tracked the increase in Federal Reserve's assets. Do not be shocked if that pattern continues over the next five or 10 years, too.
Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.
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